Bombay High Court: High Court upholds termination of an employee stating that freedom of speech and expression cannot be allowed beyond reasonableness

The Bombay High Court (“HC“) vide its judgement dated December 12, 2023, in the matter of Hitachi Astemo Fie Private Limited v. Nirajkumar Prabhakarrao Kadu [2023 SCC OnLine Bom 2652], while upholding the termination of an employee on account of inciting hate against the company, has held that the freedom of speech and expression cannot be allowed to be transgressed beyond reasonableness.

Facts

Hitachi Astemo Fie Private Limited (“Petitioner” / “Company”) had appointed Mr. Nirajkumar Prabhakarrao Kadu (“Respondent”) to work in the assembly section of the Company in 2003. The Respondent was an office bearer of a recognized union (“Union”) in the Company. In 2017, a dispute arose between the Union and the Company regarding wage settlement and the office bearers of the Union resorted to hunger strikes and rallies to pressurize the Petitioner. A settlement was arrived at between the parties after approximately twenty months. However, before the settlement, the Respondent posted two posts on his Facebook account (“Posts”), wherein he warned the management to not exploit the workmen, failing which the workmen will destroy the Company and its management. The Posts were alleged by the Petitioner to be defamatory towards the Petitioner and its management and were posted with the intention to incite the workmen during the dispute.

A charge-sheet was issued against the Respondent for uploading the Posts, alleging an act of ‘misconduct’ against him under Clauses 24(d) (Theft, fraud or dishonesty), 24(k) (Drunkenness, riotous disorderly or indecent behaviour) and 24(l) (Act subversive of discipline or good behaviour) of the Model Standing Orders (“Charge Sheet”). A domestic enquiry was conducted against the Respondent and he was found guilty of misconduct which led to termination of his services.

Respondent raised an industrial dispute to challenge his termination and dismissal which was referred to the 1st Labour Court, Pune (“Labour Court”). The Labour Court, after hearing the parties to the dispute on the two preliminary issues, concluded that the Charge Sheet and the enquiry conducted was illegal and not proper and the findings of the enquiry officer were perverse. Petitioner challenged the order of the Labour Court in the present writ petition.

Issues

• Whether the enquiry conducted against the Respondent is proper, legal and in accordance with the principles of natural justice.
• Whether the finding of enquiry officer is based on acceptable evidence.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the findings of Labour Court were incorrect since the Respondent had participated in the entire domestic enquiry with the assistance of an advocate, without raising any grievance regarding the procedure of the enquiry. The Petitioner stated that the Labour Court committed a gross error while holding that the Posts were not of a violent nature and did not amount to indecent behaviour.

It was contended by the Petitioner that the Posts, if read verbatim, incited and invoked hatred for committing offensive acts against the management of the Petitioner during the tense period of negotiations between the parties. The Petitioner submitted that no workman enjoys immunity from committing an act which is offensive and goes beyond reasonableness and therefore the findings of the Labour Court that the Posts were in the realm of freedom of speech and expression is a perverse finding.

It was contended that the findings of the Labour Court, that the act committed by the Respondent was not committed on the premises of the Company or in its vicinity and therefore charges levelled in the Charge Sheet could not be applied to the Respondent’s act, is completely erroneous since the Respondent had incited and invoked hatred which could have led to disastrous consequences against the management of the Petitioner, which would have been irreversible in nature.

The Petitioner also submitted that the Respondent had initially denied having published the Posts and took the defence that his Facebook account may have been hacked but failed to produce any evidence of his Facebook account having been hacked so as to disown the publishing of the Posts.

The Petitioner therefore submitted that the act committed by the Respondent squarely fell within the provisions of ‘commission of misconduct’ under Clauses 24(d), 24(k) and 24(l) of the Model Standing Orders.

Contentions of the Respondent:

The Respondent submitted that the Petitioner, in order to pressurize and harass the active members of the Union, has issued the Charge Sheet and suspension letter to the Respondent. He further argued that his act led to no disorderly conduct or violent atmosphere or any other act that could be classified as an imminent result of the Posts, thereby disturbing the peace in the Company.

The Respondent contended that the Posts were uploaded from outside the premises of the Petitioner and therefore the Respondent did not commit an act subversive of discipline or good behaviour on the premises of the Company which would attract the applicability of Clauses 24(d), 24(k) and 24(l) of the Model Standing Orders.

The Respondent also submitted that the Posts were in light of his fundamental right of freedom of speech and expression under the Constitution of India. The Respondent stated that passion for violence incited after reading the Posts cannot be equated with any violent act or any riotous or disorderly behaviour when in fact no such act or incident has occurred which was admitted by the witness of the management of Petitioner. The Posts were just a form of demonstration or agitation.

Observations of the HC

The HC observed that the Respondent failed to produce any evidence to the effect that his Facebook account was hacked and that he was not the author of the Posts. In that background, the HC held that it was an admitted position that the Posts were uploaded by the Respondent. The HC stated that the evidence clearly pointed out to the fact that the entire atmosphere in the Company was sensitive and agitations were being held against the Company in different forms. The Union was planning to fast until death and rally across the city. Therefore, the Posts uploaded in such a scenario could have led to any disorderly act.

The HC noted that discipline is the hallmark of any employee and regulation of behaviour of an employee is essential for the peaceful conduct of industrial activity. The HC observed that a Facebook account can be more conveniently accessed through a mobile phone and hence the submissions made by the Respondent that Respondent did not have a computer for uploading the Posts nor he was on the premises of the establishment is not proved.

The HC held that the Posts clearly amounted to misconduct when the aforementioned clauses of the Model Standing Orders are broadly interpreted. To a certain extent, commission of an act that may lead to a disorderly or riotous incident is covered by Clause 24(k) of the Model Standing Orders. Similarly, Clause 24(l) of the Model Standing Orders clearly covers the act of Respondent for having uploaded the Posts. The HC also observed that while Clause 24(d) of the Model Standing Orders may not apply to the act committed by Respondent, the word ‘dishonesty’ in Clause 24(d) of the Model Standing Orders has a wide connotation with respect to the employer’s business/property. The HC stated that in the present case, merely because no untoward incident took place, it cannot be a ground for discharging the act of posting the defamatory and provocative Posts. The Posts were directed against the Petitioner with a clear intent to incite hatred and were provocative. Further, the provocation was immediately seen in the form of likes and comments on the Posts and one such comment incited the passion to such an extent that it threatened to physically assault the management.

The HC also held that freedom of speech and expression cannot be allowed to be transgressed beyond reasonableness as it can lead to disastrous consequences. The HC noted that one cannot and should not wait for the consequences to occur in such cases.

Decision of the HC

The HC held that the adjudication on the two preliminary issues as concluded by the Labour Court cannot be accepted merely because the act of misconduct has not had any adverse effect on the peaceful working of the Company.

The HC held that the enquiry conducted and the findings returned by the enquiry officer against Respondent were absolutely fair and proper. The act committed by the Respondent stands squarely covered by Clauses 24(d), 24(k) and 24(l) of the Model Standing Orders. Therefore, the impugned order passed by the Labour Court was quashed and set aside by the HC.

VA View:

The present judgement by the HC strikes a balance between the employees’ right to freedom of speech and expression and their responsibilities towards the company. The HC has rightly upheld that freedom of speech and expression cannot be allowed to be transgressed beyond reasonableness and acts that are directed towards tarnishing the image of a company or inciting hate against a company should be nipped in the bud. The present ruling will also have a deterrent effect against misconduct by employees which unduly hampers the functioning of a company and its management.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Statutory set-off or insolvency set-off inapplicable to Corporate Insolvency Resolution Process

The Supreme Court, vide its judgment dated January 3, 2024, in the matter of Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others [Civil Appeal Nos. 3088-3089 of 2020], has undertaken an in-depth analysis of various types of set-offs recognized under law and their applicability during Corporate Insolvency Resolution Process (“CIRP”) of a company under the provisions of Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

In April 2016, Bharti Airtel Limited and Bharti Hexacom Limited (“Airtel Entities” / “Appellants”) executed eight spectrum trading agreements (“Agreements”) with Aircel Limited and Dishnet Wireless Limited (“Aircel Entities”) towards purchase of right to use spectrum to Aircel Entities in the 2300 MHz band. The aforesaid agreements were subject to approval of the Department of Telecommunications (“DoT”). DoT demanded bank guarantees in light of past dues from Aircel Entities towards license dues and spectrum usage. Aircel Entities challenged the aforesaid direction before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”). On June 3, 2016, TDSAT passed an interim order directing Aircel Entities to submit the bank guarantee. Since Aircel Entities were not in a financial position to procure and submit bank guarantee for approximately INR 453.73 crores (“Bank Guarantee”), Aircel Entities approached Airtel Entities to do the same on their behalf. Both the entities entered into three letters of understanding for the aforesaid purpose.

Airtel Entities were obligated to pay INR 4,022.75 crores to Aircel Entities under the eight Agreements. Airtel Entities were to deduct INR 586.37 crores from consideration payable to Aircel Entities under the Agreements. Upon Aircel Entities subsequently replacing the Bank Guarantees furnished by Airtel Entities and Airtel Entities receiving back the Bank Guarantees, INR 411.22 crores were payable by the Airtel Entities to the Aircel Entities. Thereafter, on January 9, 2018, TDSAT held that the demand of Bank Guarantee was not tenable and directed DoT to return the Bank Guarantees (“TDSAT Order”). However, DoT did not accept the TDSAT Order and preferred appeal before Supreme Court in 2018. Cross-appeals were filed by Aircel Entities. By order dated November 28, 2018, Supreme Court held that at the interim stage, the TDSAT Order, in so far as Bank Guarantees are concerned, shall be given effect to. However, DoT did not return the Bank Guarantees. Pursuant thereto, Airtel Entities approached the bank seeking confirmation of cancellation of Bank Guarantee. Since banks were reluctant, Airtel Entities approached the Supreme Court, which passed an order dated January 8, 2019 directing that Bank Guarantees shall be cancelled and not be used for any purpose whatsoever.

Thereafter, Airtel Entities made a payment of INR 341.80 crores on January 10, 2018. However, the remaining amount of INR 145.20 crores was set-off by the Airtel Entities stating that the aforesaid amount was owed by Aircel Entities to Airtel Entities towards net amount payable for operation charges, SMS charges and interconnect usage charges to Airtel Entities.

In March 2018, CIRP of Aircel Entities was initiated. Mr. Vijaykumar V. Iyer (“Respondent” / “Resolution Professional”) was appointed as the interim resolution professional in respect of both the Aircel Entities. Bharti Airtel Limited (“Bharti Airtel”) filed claim on account of interconnect charges as well as on behalf of Telenor (India) Communications Private Limited (“Telenor”) in view of merger of both the aforesaid companies. Bharti Hexacom Limited also filed a claim. Total claim filed by Airtel Entities was INR 203.46 crores. However, Airtel Entities also owed INR 64.11 crores towards interconnect charges to Aircel Entities.

Resolution Professional admitted claims of Airtel Entities to the tune of INR 112 crores. Claim of Telenor was not accepted. Thereafter, on January 12, 2019, the Resolution Professional addressed a letter to Bharti Airtel stating that they had suo moto adjusted INR 112.87 crores from INR 453.73 crores payable by Airtel Entities to Aircel Entities. Resolution Professional called upon Bharti Airtel to pay INR 112.87 crores failing which he would be obligated to take legal recourse. In response thereto, Airtel Entities objected on various grounds and also claimed set-off of the amount due to them by the Aircel Entities from the amount payable by them to the Aircel Entities. However, Resolution Professional rejected their reply and claim for set-off.

Thereafter, Airtel Entities approached the National Company Law Tribunal, Mumbai (“NCLT”) which passed an order dated May 1, 2019 and held that Airtel Entities were entitled to set-off INR 112.87 crores from the payment, which was due and payable to Aircel Entities. Resolution Professional challenged the NCLT order before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) wherein NCLAT held that set-off is violative of basic principles and protection provided to a corporate debtor under CIRP under the provisions of IBC. Aggrieved by the NCLAT order, the Airtel Entities approached the Supreme Court.

Issue

Whether set-off done at the behest of any entity against a company undergoing CIRP for a period prior to commencement of CIRP is violative of the basic principles and provisions of IBC.

Arguments

Contentions of the Appellants:

It was contented by the Appellants that they were entitled to approach NCLT under Section 60(5) (Adjudicating Authority for corporate persons) of IBC which confers jurisdiction to NCLT to entertain and dispose of any application or proceeding by or against corporate debtor.

Placing reliance on definitions of “claim” and “debt” as provided in sub-sections (6) and (11) of Section 3 (Definitions) of IBC, Appellants argued that the concept of set-off derived from common law principles is automatic and self-executing. Appellants further contended that the amount in question with respect to set-off does not form part of the assets of the corporate debtor and therefore the question of violation of Section 14 (Moratorium) of IBC does not arise.

It was further contended by the Appellants that Section 30 (Submission of resolution plan) of IBC seeks to ensure that assets and liabilities of corporate debtor as recorded in the resolution plan correspond to the liquidation estate of corporate debtor in liquidation, whereby Section 36(4) (Liquidation estate) of IBC provides for assets which do not form part of the liquidation estate and permits the Insolvency and Bankruptcy Board of India to specify assets which could be subject to set-off on account of mutual dealings between the corporate debtor and the creditor.

Observations of the Supreme Court

Supreme Court observed that there are five aspects of set-off: (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off. It was observed that contractual set-off arises out of agreement between parties, whereby parties mutually and consensually decide the terms of set-off as long as it is not against the purview of legality and public policy. In ascertaining the applicability of contractual set-off, courts need to ascertain intention of the parties. Right of contractual set-off may be explicitly set out in the clauses of the agreement or can be interpreted from existence of oral or implied agreement. Statutory or legal set-off is created by virtue of a statute. Pertinently, Order VIII Rule 6 of the Code of Civil Procedure, 1908 (“CPC”) provides that where a suit for recovery of money is filed, the defendant can claim set-off against the plaintiff’s demand for a sum of money legally recoverable, subject to not exceeding pecuniary limits of the jurisdiction of the court. Equitable set-off is a common law principle which flows from the judicial precedents for an unascertained sum of monies being payable as damages. Certain jurisdictions such as United Kingdom recognize the principle of insolvency set-off, which is essential at the stage of liquidation process.

Pertinently, Section 173 (Mutual credit and set-off) of IBC and Regulation 29 (Mutual credit and set-off) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) deal with set-off. However, the aforesaid provision relates to liquidation process and not CIRP. Further, Section 36(4) of IBC permits the Insolvency and Bankruptcy Board of India to specify assets which could be subject to set-off on account of mutual dealings between the corporate debtor and the creditor. However, Supreme Court made it clear that the aforesaid provisions pertain to liquidation process and have been analyzed for the purpose of legal understanding only and are not applicable to the present case.

Thereafter, Supreme Court analyzed the expression “mutual dealing”. In this regard, Supreme Court referred to various judgments pronounced in foreign as well as Indian jurisdiction and arrived at the conclusion that the expression “mutual dealings” in Regulation 29 of the Liquidation Regulations is wider than statutory set-off contemplated under CPC as well as equitable set-off under common law prevailing in Indian legal jurisdiction. It was further observed that insolvency set-offs are applicable only where demands are between the same parties, that is, there must be commonality of identity between the person who has made the claim and the person against whom the claim exists.

In so far as the contention raised by Airtel Entities that Section 30 of IBC seeks to ensure that assets and liabilities of corporate debtor as recorded in the resolution plan correspond to the liquidation estate of corporate debtor in liquidation, Supreme Court observed that basis perusal of Section 30(2)(b)(ii) of IBC, it is clear that legislature has neither intended nor provided for any such analogy.

Further, it was observed that in the matter of Swiss Ribbons Private Limited and Another v. Union of India and Others [(2019) 4 SCC 17], which refers to a claim for set-off being considered by the resolution professional during resolution process, such set-off is a rarity.

In so far as the contention raised by Airtel Entities on maintainability of the application to NCLT under Section 60(5) of IBC, Supreme Court observed that the aforesaid legal provision is to aid and assist the corporate debtor throughout CIRP and not for the purpose of allowing a creditor/debtor to claim set-off during CIRP of the corporate debtor.

In so far as the contention raised by Airtel Entities that the concept of set-off derived from common law principles is automatic and self-executing, Supreme Court rejected this argument and observed that there is no such provision in IBC to suggest that insolvency set-off is automatic or self-executing.

The relationship and nature of identity of the corporate debtor undergo a change on the commencement of CIRP. Set-off of dues payable by corporate debtor for a period prior to CIRP cannot be made, and is not permissible in law, from the dues payable to the corporate debtor post the commencement of CIRP. Hence, on account of the aforementioned reason, this will not meet the mandate of mutual dealing and will be contrary to equity and would amount to misuse of the provision of insolvency set-off. Further, it was observed that such insolvency set-off puts the creditor, even an operational creditor, in a better position as compared to other creditors, to the extent of set-off. Hence, it violates the doctrine of pari passu which is recognized in common law. Though the principle of pari passu is not expressly stipulated in IBC, however, it is apparent in Section 53 (Distribution of assets) read with Section 52 (Secured creditor in liquidation proceedings) of IBC. Further, such set-off also violates the principle of anti-deprivation, which in simple words, means that a person cannot contract to obtain a more beneficial position in the event of bankruptcy than what the law otherwise provides.

Further, Supreme Court observed that provisions of set-off provided under CPC or the Liquidation Regulations cannot be applied to any corporate debtor undergoing CIRP. However, the aforesaid rule would be subject to two exceptions. The first exception would be where a party is entitled to contractual set-off on the date which is effective before or on CIRP commencement date. The second exception would be equitable set-off when the claim and counter claim in the form of set-off are linked and connected on account of one or more transactions that can be treated as one.

In so far as the contention raised by Airtel Entities that set-off does not violate moratorium as envisaged under Section 14 of IBC, Supreme Court observed that amounts in question have become payable post the commencement of CIRP and hence rejected the contention of Airtel Entities that by not allowing set-off, new rights are created and that Section 14 of IBC will not be applicable.

Decision of the Supreme Court

Supreme Court held that statutory set-off or insolvency set-off is inapplicable to CIRP under the provisions of IBC. In light of the aforesaid ratio, Supreme Court observed that there is no merit in the present appeals and dismissed the same.

VA View:

Since the enactment of IBC, there have been multiple instances of set-off done at the behest of various creditors during CIRP and such set-offs have taken place during the CIRP towards pre-CIRP dues. Consequently, multiple applications filed by various resolution professionals are pending adjudication before the Adjudicating Authority.

This judgment is the first landmark pronouncement after the enactment of IBC which makes an in-depth analysis of various kinds and principles of set-off recognized in common law and thereafter analyses the concept of set-offs under the provisions of IBC and rules and regulations thereunder. Further, this judgment makes it clear that statutory set-off or insolvency set-off is inapplicable to CIRP. Also, this judgment settles the legal provision once and for all that set-off done at the behest of any entity against a company undergoing CIRP for a period prior to commencement of CIRP is violative of the basic principles and provisions of IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Nomination process under the Companies Act, 1956/ Companies Act, 2013 does not override succession laws

The Supreme Court, vide its judgment dated December 14, 2023, in the matter of Shakti Yezdani and Another v. Jayanand Jayant Salgaonkar and Others [Civil Appeal No. 7107 of 2017], held that the Companies Act, 1956 (“CA, 1956”) does not deal with the law of succession nor does it override the laws of succession and the nominee does not receive absolute legal ownership of the subject matter of the nomination upon the death of the shareholder. This interpretation is applicable to CA, 1956 (and its equivalent provisions in the Companies Act, 2013 (“CA, 2013”)) and the Depositories Act, 1996 (“Depositories Act”).

Facts

Mr. Jayant Salgaonkar (“Testator”), family patriarch, executed a will on June 27, 2011 which made certain provisions for the devolution of the estates of the Testator upon the successors. Apart from the estate listed out in the will, the Testator had some fixed deposits and mutual fund investments (“Securities”) in respect of which nominees were appointed by the Testator. A suit was filed in the Bombay High Court by Mr. Jayanand Jayant Salgaonkar (“Respondent”) (a legal heir of the Testator who was not a nominee), wherein the administration of the properties of the deceased under the supervision of the court was claimed by the Respondent. On the other hand, Shakti Yezdani and others (“Appellants”), the sole nominees of the mutual funds, claimed for an absolute ownership of the Securities and the legal heirs contested their claim.

A single judge of the Bombay High Court took into consideration the provisions of CA, 1956 and the Depositories Act pertaining to nomination of securities and the rights of nominees and legal heirs and held that a nominee is not vested with the absolute ownership of the Securities and it was held by the Bombay High Court that nomination does not override testamentary or intestate succession and thus, CA, 1956 and the Depositories Act do not create a third mode of succession. Further, the division bench of the Bombay High Court also upheld the judgment of the singe judge, after hearing an appeal filed before it by the Appellants. Further, a second appeal was filed against the order of the division bench of the Bombay High Court before the Supreme Court.

Issues

• Whether a nominee of a holder of shares or securities, appointed under Section 109A (Nomination of shares) of CA, 1956 read with the bye-laws under the Depositories Act, is entitled to the beneficial ownership of the shares or securities which are subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estate of the holder as per the law of succession.
• Whether a nominee is entitled to all rights in respect of the shares or securities which are subject matter of nomination to the exclusion of all other persons or whether he continues to hold the securities in trust and in a capacity as a beneficiary for the legal representatives who are entitled to inherit securities or shares under the law of inheritance.
• Whether a bequest made in a will executed in accordance with the Indian Succession Act, 1925 (“Succession Act”) in respect of shares or securities of the deceased supersedes the nomination made under the provision of Sections 109A of CA, 1956 and bye-law no. 9.11 framed under the Depositories Act.

Arguments

Contentions of the Appellants:

It was contended by the Appellants that the nomination framework under CA, 1956 differs from that in other legislations. It was pointed out that the terms, including ‘vesting’, and ‘to the exclusion of others’, as well as a ‘non-obstante clause’ in CA, 1956, sets it apart from other laws. Consequently, it was argued by the Appellants that relying on judgments pertaining to nominations in other statutes such as the Insurance Act, 1939, Banking Regulation Act, 1949, National Savings Certificates Act, 1959, Employees Provident Fund and Miscellaneous Provisions Act, 1952, for interpreting the provisions of Sections 109A and 109B (Transmission of shares) of CA, 1956, would be incorrect. It was asserted by the Appellants that the provisions contained in other legislations cannot act as a ground for the interpretation of the term ‘nomination’ under CA, 1956 as they are not pari materia with Sections 109A and 109B of CA, 1956 (now Section 72 (Power to nominate) of CA, 2013).

It was argued by the Appellants that the inclusion of Sections 109A and 109B in CA, 1956 by the legislature on August 31, 1988 is explicit in conveying that a nominee, following the death of the shareholder or debenture holder, attains complete and exclusive ownership rights concerning the shares designated to them. Further, examining the hierarchy outlined in the provision, starting with shareholder in an individual capacity, followed by joint shareholders owing shares jointly, and ultimately, the nominee to whom the shares shall vest in the event of the shareholder or joint shareholders’ death, it is asserted that the intention is clear that such nomination takes precedence over any disposition, whether testamentary or otherwise.

It was also contended by the Appellants that Sections 187C (Declaration by persons not holding beneficial interest in any share) and 109A(3) of CA, 1956 should be interpreted together, indicating that shares shall ‘vest’ with the nominee, excluding all other persons unless the nomination is altered or revoked. The Appellants also contended that Section 187C of CA, 1956 inherently outlines the process for varying the nomination through a suitable declaration, establishing these provisions as complete codes within themselves. When considered in conjunction, the absence of a declaration altering the nomination would imply that the intention was to confer beneficial ownership of the shares to the Appellants through the mechanism of nomination of rights. Since the will of the Testator had explicitly mentioned all other properties of the Testator except the Securities for which the Appellants were designated as nominees, it naturally implies that the ownership rights of those Securities would pass on to the nominees after the Testator’s death.

Reference was made by the Appellants to the bye-law of the Depositories Act governing the transmission of securities in case of nomination. The presence of a non-obstante clause within this provision implies that the effect of nomination under the bye-law is that it would vest complete title of the shares within the nominee, irrespective of provisions in testamentary disposition(s) or nomination(s) under other laws which governs securities.

It was further pointed out by the Appellants that Regulation 29A (Nomination) of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 mandates asset management companies to provide the option to its unit holder to nominate a person in whom all rights of the units shall vest in the event of the unit holder’s death. It was the contention of the Appellants that when a change in nomination cannot be made without the consent of the other joint shareholder(s), the same cannot be made by way of a will or testamentary dispositions or laws of succession either.

It was asserted by the Appellants that the Bombay High Court’s interpretation is inconsistent with the legislative intent behind the insertion of Sections 109A and 109B into CA, 1956. As per the Appellants, acceptance of the Bombay High Court’s interpretation would undermine the legislature’s intent pertaining to the ease of succession planning.

Contentions of the Respondent:

The Respondent emphasized that CA, 1956 does not deal with the law of succession and that the nominee of a share or the securities holder is not entitled to exclusive ownership of the shares or securities. The Respondent contended that the consistent view of various courts, including the Supreme Court, is that a nominee does not become the absolute owner of the estate. The Respondent stated that nomination does not affect the usual mode of succession and the legal heirs have not been excluded by virtue of the nomination.

It was argued by the Respondent that the nomination provisions do not confer absolute ownership rights to the nominees, and that the nominees do not become full owners of the estate for which they have been nominated. Additionally, the Respondent contended that the nomination provisions should not be considered as a form of ‘statutory testament’ that supersedes the law of succession as per the Succession Act. The Respondent also emphasized the need for a detailed judicial process to obtain letters of administration or succession certificates, as prescribed by the Succession Act, and argued that the nomination provisions do not replace the said process.

Observations of the Supreme Court

The Supreme Court, with a broad interpretation, in-depth analysed the provisions, scheme, and object of CA, 1956 as well as CA, 2013 and the amendments to it, the implication of the scheme of nomination under different statues and various judgement of different courts. The Supreme Court observed that the provisions of CA, 1956 do not deal with succession in any manner and it do not create a third mode of succession and do not override the law in relation to testamentary or intestate succession. Therefore, Supreme Court rejected the contention of nomination as a ‘statutory testament.’ Additionally, it was observed by the Supreme Court that there exists no material to depict that the intent of the legislature behind introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of shares on the said nominee. Further, the Supreme Court observed that the non-obstante clause in Section 109A of CA, 1956 and bye-law no. 9.11.7 of the Depositories Act cannot be held to exclude the legal heirs from their rightful claim over the securities against the nominee. The said non-obstante clause does not contemplate a third line of succession under CA, 1956.

The nomination under these provisions does not grant absolute title over the subject property for which the nomination has been made in respect to the ownership in favour of the nominee, and it is not intended to restrict the law of succession in any manner. Further, the court also observed that the term ‘vesting’ does not confer absolute ownership of the securities in favour of the nominee which is also a well settled position under various other pari materia legislations. The object of addition of nomination facility in the Companies (Amendment) Act, 1999 was only to provide an impulsion to the investment climate and ease the burdensome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

Decision of the Supreme Court

The Supreme Court dismissed the appeal, upheld the decision of the Bombay High Court and held that a nominee does not attain absolute title over the property for which the nomination has been made and it does not override testamentary or intestate succession. The Supreme Court also laid emphasis on the need for consistency in interpreting settled principles of law and the significance of maintaining certainty in legal decisions. The Supreme Court also held that the same principles that apply to nomination in estate planning and succession laws should also apply to the devolution of securities. Thus, it was held by the Supreme Court that nomination must be considered as ordinarily understood by a reasonable person making nominations, with respect to their movable/immovable properties.

It was also held by the Supreme Court that the non-obstante clause under Section 109A(3) of CA, 1956 and bye-law no. 9.11.7 of the Depositories Act should be interpreted keeping in mind the intent with which the provisions for facilitating nomination for securities was introduced in the scheme of CA, 1956, that is, to enable smooth functioning of a company pursuant to the death of a shareholder.

VA View:

The present case is a landmark ruling which settles the long pending and complex debate, followed by a series of contradictory judicial pronouncements by the courts of different jurisdictions, pertaining to the rights of the successors and nominees of an individual in relation of the shares or securities.

The Supreme Court has rightly clarified that the nomination process does not override the laws of succession as the purpose of the nomination process is merely simplification of the transfer of securities and protection of the subject matter of the nomination until the legal heirs can establish their right of succession. Therefore, the Supreme Court has in an appropriate manner brought a harmonious construction and given due consideration to both the laws of nomination as well as succession laws.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Delhi High Court: Petition under Section 34 of the Arbitration Act dismissed twice for non-prosecution, court denies benefit under Section 14 of the Limitation Act citing lack of diligent prosecution

The Delhi High Court (“Delhi HC”), in its judgement dated December 12, 2023, in the matter of U.P. Jal Vidyut Nigam Limited v. C.G. Power and Industrial Solutions Limited [FAO(OS) (COMM) 120/2019], has held that the benefit under Section 14 (Exclusion of time of proceeding bona fide in court without jurisdiction) of the Limitation Act, 1963 (“Limitation Act”) would not be available to a petitioner who, through lack of diligence, allowed its petition under Section 34 (Application for setting aside arbitral awards) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to be dismissed twice for non-prosecution.

U.P. Jal Vidyut Nigam Limited (“Appellant”) had notified tenders for the execution of power house electrical equipment at Saharanpur district, which was awarded to C.G. Power and Industrial Solutions Limited (“Respondent”) and a contract dated September 28, 1988 was executed between them. Subsequently, disputes arose between the Appellant and the Respondent, and it was referred to arbitration. On March 15, 2001, the arbitral tribunal pronounced an award for INR 95,74,733 in favour of the Respondent (“Arbitral Award”).

Aggrieved by the Arbitral Award, the Appellant filed an application challenging the Arbitral Award under Section 34 of the Arbitration Act (“Section 34 Petition”) before the Civil Judge, Saharanpur on July 2, 2001, that is, after a lapse of 110 days from the Arbitral Award. The Section 34 Petition faced procedural challenges, including transfers between different courts and dismissals on 2 occasions. Resultantly, the Respondent filed an execution petition before the District Judge, Saharanpur for execution of the Arbitral Award. In the meantime, an application for the stay on execution was filed by the Appellant before the District Judge, Saharanpur, and the same was rejected by the District Judge, Saharanpur, vide its order dated January 6, 2018 (“Order”). With a view to challenge the Order, the Appellant filed a petition (“Restoration Application”) under Article 227 (Power of superintendence over all courts by the High Court) of the Constitution of India before the Allahabad High Court (“Allahabad HC”), in order to restore the application filed for the stay of execution proceedings. By an order dated February 19, 2018, the Allahabad HC allowed the Restoration Application and directed the Appellant and Respondent to refrain from seeking adjournment till the Restoration Application was adjudicated upon. In the meantime, the proceedings filed by the Respondent before the District Judge, Saharanpur for execution of the Arbitral Award was to also remain in abeyance.

On March 14, 2018, a trial court in Allahabad allowed the Restoration Application filed by the Appellant, thereby reviving the Section 34 Petition. Subsequently, the Appellant filed an application before the District Judge, Saharanpur for the withdrawal of the Section 34 Petition with liberty to file the same before a court of competent jurisdiction. This was allowed by the District Judge, Saharanpur vide its order dated May 3, 2018. Owing to the aforementioned events, the Section 34 Petition was pending adjudication in the courts at Saharanpur for more than 15 years.Thereafter, the Appellant filed the Section 34 Petition before the District Judge, Patiala House Court, New Delhi (“Patiala House Court”) on May 8, 2018, which petition was returned by the Patiala House Court to be filed before a single-judge bench of the Delhi HC, in view of the fact that the Patiala House Court lacked pecuniary jurisdiction to entertain the Section 34 Petition. Consequently, the Appellant proceeded to file the Section 34 Petition before a single judge bench of the Delhi HC on August 25, 2018. Hence, the Section 34 Petition was filed before the Delhi HC after more than 17 years from the date of the Arbitral Award. This Section 34 Petition was accompanied by an application under Section 14 of the Limitation Act seeking the exclusion of 6,263 days which had been spent in the proceedings before the courts at Saharanpur. The single judge of the Delhi HC, vide its order dated April 12, 2019 (“Impugned Order”) dismissed the Appellant’s application filed under Section 14 of the Limitation Act and the Section 34 Petition.

Aggrieved by the Impugned Order, the Appellant filed the present appeal under Section 37 (Appealable orders) of the Arbitration Act before the Division Bench of Delhi HC to set aside the Impugned Order.

Issue

Whether for the purposes of calculating limitation under Section 34(3) of the Arbitration Act, the delay of 6,263 days can be excluded and condoned in terms of Section 14 of the Limitation Act.

Arguments

Contentions of the Appellant:

The Appellant contended that it was entitled to the exclusion of the period during which it was prosecuting the Section 34 Petition before the courts at Saharanpur and the Patiala House Court, as the same was due to wrong legal advice received by the Appellant. Further, the Appellant submitted that it was pursuing the instant case in a bona fide and diligent manner, and that the Section 34 Petition was wrongly filed before the Patiala House Court instead of the Delhi HC due to incorrect legal advice.

The Appellant submitted that the applicability of Section 14 of the Limitation Act was not excluded under Section 34(3) of the Arbitration Act, and that Section 14 of the Limitation Act should be interpreted and adopted liberally to advance the cause of justice. In order to support this argument, the Appellant relied on the judgment of the Hon’ble Supreme Court (“SC”) in the case of Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others [(2008) 7 SCC 169] (“Consolidated Engineering Case”), wherein the SC had held that Section 14 of the Limitation Act would be applicable to proceedings under Section 34(3) of the Arbitration Act.

Contentions of the Respondent:

The Respondent submitted that the Section 34 Petition was initially filed before the Civil Judge, Saharanpur, which was dismissed twice due to non-prosecution. Even upon the withdrawal of the Section 34 Petition from the court of the Additional District Judge, Saharanpur, the Appellant had wrongly filed the Section 34 Petition before the Patiala House Court, albeit being fully aware of the fact that the Patiala House Court lacked pecuniary jurisdiction to entertain the said petition. The Respondent also contended that the Appellant had prosecuted the Section 34 Petition filed before the Patiala House Court despite an objection for lack of jurisdiction of court being raised by the Respondent. Besides, the Appellant had taken steps towards filing the Section 34 Petition before the Delhi HC only after a lapse of 63 days after the Patiala House Court allowed the Respondent’s objection for lack of jurisdiction of the Patiala House Court.

The Respondent relied on several judgements pronounced by the SC, including the case of Madhavrao Narayanrao Patwardhan v. Ramkrishnagovind Bhanu and Others [(1959) SCR 564] (“Madhavrao Narayanrao Case”), in order to support its submission that the Appellant had failed to demonstrate due diligence and good faith while prosecuting the case.

Observations of the Delhi HC

The Delhi HC observed that Section 14 of the Limitation Act had been enacted to exempt a period covered by litigious activity and to protect a litigant against the bar of limitation, where a proceeding is dismissed on account of a technical defect instead of being decided on merits. Therefore, the intent of the legislature is to prevent a litigant from being saddled with an adverse decision, which is, on account of the fact that a court did not have the jurisdiction to entertain the case.

The Delhi HC observed that, in the Consolidated Engineering Case, the SC, while elaborating on the principles laid down in the Madhavrao Narayanrao Case, had detailed the pre-conditions which must co-exist and ought to be satisfied for application of the benefit under Section 14 of the Limitation Act, which pre-conditions have been reproduced below:
“21.……
(1) Both the prior and subsequent proceedings are civil proceedings prosecuted by the same party;
(2) The prior proceeding had been prosecuted with due diligence and in good faith;
(3) The failure of the prior proceeding was due to defect of jurisdiction or other cause of like nature;
(4) The earlier proceeding and the latter proceeding must relate to the same matter in issue and;
(5) Both the proceedings are in a court.…”

The Delhi HC observed that Section 2(h) of the Limitation Act defines the term ‘good faith’ as “nothing shall be deemed to be done in good faith which is not done with due care and attention”. The Delhi HC further observed that the SC, while discussing the term ‘due care and attention’ in the context of Section 14 of the Limitation Act, in the Madhavrao Narayanrao Case, had held that what ought to be considered is whether a plaintiff had brought on record any evidence to show that he was prosecuting the previously instituted suit with due diligence. The measure of due diligence and prosecuting in good faith would have to be decided based on the facts of each case.

The Delhi HC observed that sequence of the events in the instant case demonstrated a complete absence of due diligence on the part of the Appellant. The Appellant had not provided an explanation for either the transfers or pendency of the Section 34 Petition or for the dismissals thereof. Moreover, the Appellant had also failed to provide an explanation as to why the Section 34 Petition was filed before the Patiala House Court which lacked jurisdiction to entertain such a petition.

Furthermore, the Appellant was completely devoid of any reasons why the Section 34 Petition was pending adjudication in the courts at Saharanpur for more than 15 years. The Delhi HC observed that the conduct of the Appellant clearly established that the prior proceedings were not being prosecuted diligently or in good faith. Further, the 5 pre-conditions for allowing the application under Section 14 of the Limitation Act did not co-exist.

Decision of the Delhi HC

In view of the above, the Delhi HC found no reason to interfere with the Impugned Order and dismissed the appeal filed by the Appellant.

VA View:

The Delhi HC has rightly observed that the Petitioner’s conduct, at the time of prosecuting the prior proceedings before the courts at Saharanpur and Patiala House Court, failed to demonstrate due diligence and good faith.

Through this judgement, the Delhi HC has emphasized that due diligence and good faith are essential pre-requisites for invoking the benefit under Section 14 of the Limitation Act, which exempts a period covered by litigious activity and protects a litigant against the bar of limitation when a proceeding is dismissed on account of a technical defect instead of being decided on merits. Therefore, an application under Section 14 of the Limitation Act would not be available to a petitioner who, through its lack of diligence, allowed its petition to be dismissed twice for non-prosecution.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: An instrument which is compulsorily convertible into shares such as a compulsorily convertible debenture, is to be treated as an equity instrument and not regarded as a financial debt under IBC

The Supreme Court, vide its judgment dated November 9, 2023, in the matter of M/s. IFCI Limited v. Sutanu Sinha and Others [Civil Appeal No. 4929/2023], has held that as per the facts in the present case, compulsorily convertible debentures (“CCDs”) should be treated as an equity instrument instead of a debt instrument, since it was not stipulated that these CCDs would partake the character of financial debt on the happening of a particular event.

Facts

IVRCL Chengapalli Tollways Limited (“ICTL” / “Corporate Debtor”) and the National Highways Authority of India (“NHAI”) had executed a concession agreement dated March 25, 2010 (“Concession Agreement”), for giving effect to a project awarded by the NHAI. ICTL was incorporated as a wholly-owned subsidiary of IVRCL Limited (“IVRCL”), and secured a term loan from a consortium of lenders as part of the debt component to finance the project. The remaining funds were to be provided by IVRCL through equity infusion, with a portion to be sourced through CCDs. M/s. IFCI Limited (“Appellant”) invested in these CCDs.

The Debenture Subscription Agreement dated October 14, 2011 (“DSA”) required IVRCL to make coupon payments, provide security, and grant a ‘put option’ to the Appellant, thus allowing the latter to sell the CCDs to a third party in case of default. The project encountered financial challenges, leading to non-payment to the Appellant. Although the Corporate Debtor proposed a one-time settlement, it was subsequently revoked, prompting the Appellant to invoke the corporate guarantee provided by IVRCL, following which, both Appellant and the State Bank of India initiated the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Appellant submitted his claim as a financial debt to the resolution professional (“Respondent”) which was rejected by the Respondent based on the following grounds: (i) the nature of CCDs issued was recorded as an equity instrument in all the agreements executed between the parties, including the Concession Agreement and the DSA; (ii) the project cost approved by the NHAI and lenders consortium recognized the CCDs as the part of equity, and at no point in time did the Appellant sought for re-categorization of the CCDs to debt or the approval from NHAI for such conversion; (iii) the payments obligations under the DSA were that of IVRCL and the balance sheet of the Corporate Debtor also clarifies that; and (iv) the CCDs were mandatorily convertible in December, 2017.

The Appellant, vide IA No. 1465/2022, filed an application before the National Company Law Tribunal (“NCLT”) against the rejection of its claim by the Respondent. NCLT, vide its order dated March 14, 2023, rejected the claim of the Appellant, by placing reliance on the judgment of the Supreme Court in the case of Narendra Kumar Maheshwari v. Union of India and Others [(1990) Suppl. SCC 440] (“Narendra Kumar Case”), wherein it was held that any instrument which is compulsorily convertible into shares is regarded as an “equity” and not a loan or debt. The said order was also upheld by National Company Law Appellate Tribunal (“NCLAT”), vide its order dated June 5, 2023.

The present appeal has been filed by the Appellant against the impugned order of NCLAT under Section 62 (Appeal to Supreme Court) of IBC before the Hon’ble Supreme Court.

Issue

Whether CCDs could be treated as a debt instrument instead of an equity instrument.

Arguments

Contentions of the Appellant:

The Appellant submitted that in the event the Appellant is treated neither as a shareholder nor as a financial creditor, the Appellant will be rendered remediless.

The Appellant distinguished the Narendra Kumar Case on the basis that the context in the said judgment was a public interest litigation, and has referred to the concept of the debentures which are intrinsically in the nature of debt, whereas the present case deals with the question as to the treatment of CCDs as equity or debt.

The Appellant contended that the entire principal amount along with the interest became due and payable under the CCD, since the conversion of CCDs to equity actually became impossible due to the insolvency of the Corporate Debtor. The Appellant further contended that the nature of the CCDs should be ascertained based on the status of the maturity of the CCDs and the position of the investor at the inaugural time, and this would vary in the facts and circumstances of each case.

Contentions of the Respondent:

The Respondent submitted that the concept of compulsorily convertible instruments including CCDs falls within the definition of equity as opposed to debt which has been defined as liability or obligation in respect of a claim which is due from any person. The Respondent further stated that the Corporate Debtor does not have a liability towards the Appellant, since the Appellant is an equity participant who would receive benefit on the success of a commercial venture, and would not inhere in case of the failure of such commercial venture.

The Respondent also submitted that prior written approval of lenders was required before the Corporate Debtor could issue any debentures or raise any loans, and the Corporate Debtor at no occasion has sought the approval of the lenders to issue any debentures or debt to the Appellant. The Respondent contended that the financing plan itself envisaged CCDs as part of the equity portion of the funding.

The Respondent lastly contended that if the instrument was a simpliciter debenture, it would have fallen under the category of a financial debt but the present case deals with CCDs. The primary obligations of coupon payments, buy back and security is on the part of IVRCL, resulting in no liability on the part of the Corporate Debtor towards the Appellant.

Observations of the Supreme Court

The Supreme Court analyzed the DSA which clearly defined the role of the Corporate Debtor as the special purpose vehicle, IVRCL as the sponsor company and the Appellant as the lender. The clauses also clarified the position that the Appellant was provided security under the DSA and the primary obligations such as making coupon payments, providing security were that of IVRCL, moreover, the buy-back arrangement was also entered into between the Appellant and IVRCL. The Supreme Court further observed that unless the debt is of the Corporate Debtor, the Appellant cannot seek a recovery of the amount on the basis of being a creditor of the Corporate Debtor.

The Supreme Court, placing reliance on Nabha Private Limited v. Punjab State Power Corporation Limited [(2018) 11 SCC 508], also stated that a contract means as it reads, and it is not advisable for a court to supplement it or add to it.

The Supreme Court noticed that the terms of the various agreements prohibited the Corporate Debtor from taking further debt without the consent of the assignees. Further, no approval was sought or taken from NHAI. Hence, the amount was treated as an equity alone and not as a debt.

With respect to the appellate jurisdiction of the Supreme Court under IBC, the Supreme Court clarified that the jurisdiction is restricted to a question of law, akin to a second appeal. The law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters. Thus, the dispute has to be analyzed within the four corners of the statutory jurisdiction conferred on the Supreme Court.

Decision of the Supreme Court

The Supreme Court upheld the order of NCLAT opining that the issue has been correctly crystallized as to whether CCDs could be treated as a debt instead of an equity instrument. Treating the CCDs as debt would tantamount to breach of the Concessional Agreement and the common loan agreement. The investment was clearly in the nature of debentures which were compulsorily convertible into equity and nowhere is it stipulated that these CCDs would partake the character of financial debt on the happening of a particular event.

VA View:

The present judgment clarifies the treatment of compulsorily convertible instruments as equity. It has become a settled position of law that when an investment is made in the nature of debentures which are compulsorily convertible into equity and nowhere is it stipulated that the CCDs would partake the character of financial debt on the happening of a particular event, the CCDs are to be treated as equity.

The Supreme Court further limited the powers of the court to interpret any commercial contract. It held that a contract means as it reads, and it is not advisable for a court to supplement it or add to it. The Supreme Court also deduced its appellate jurisdiction under IBC to hold that law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters and the jurisdiction of the Supreme Court under Section 62 of IBC is restricted to a question of law, akin to a second appeal.

For any query, please write to Mr. Bomi Daruwala at [email protected]